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Option Greeks is a difficult topic. Not because the concepts are difficult, but because people tend to either be scared of them and try and avoid thinking about them, or they get so bogged down in the mathematical modelling aspects that they end up with analysis paralysis and stop trading.
Let's keep it simple. Firstly , the Option Greeks are not scary spartans, but are just measuring tools, like inches, kilogrammes and mpg.
Secondly , you don't always need to use all of them. The Greeks that you use depends entirely on the type of trading that you do.
Thirdly , the Greeks are no more an exact science than any economic indicator. Therefore, you do not need to worry about the fourth decimal point. You need to be looking at broad trends, not minute details.
Click here for a free 5 minute primer in Option Greeks. I will focus on five out of the six Option Greeks: Delta, Gamma, Theta, Vega and Zeta.
The sixth, Rho, has almost no relevance for active traders. DELTA measures the rate at which the price of the option changes with changes in the underlying stock analagous to speed. Why is this important? When choosing options, you want to find those with a reasonably high delta, so that as the stock moves, the option will rapidly follow suit. This means that you can balance your trades in such a way that DELTA is effectively zero, in which case you win whichever way the stock moves these strategies tend to be low in profit, low in risk, but high in commissions.
GAMMA is really only useful for those who trade Delta Neutral options - if Gamma is high, it means that the stability of your trade could change any time, and so you need to monitor your position closely. THETA measures the rate at which the price of the option changes over time. The closer you are to expiration, the more the THETA grows - the price of the option decreases at an increasing rate over time.
If you SELL calls, puts or credit spreads, you simply have to hold on to the option, watching as its value decreases every day until it expires worthless unless it is ITM , at which point you pocket your profits and do it again! Selling Options with high Theta means that you will be able to watch the value of an option decrease rapidly, and become almost valueless, at which point you can buy the option back for next to nothing, and sell another one.
You can see how I do this regularly on my Credit Spreads page. In both cases, higher volatility means higher options premiums, and therefore potentially more profit; it also means more risk! Historical Volatility measured by VEGA is a statistical measure of how volatile the stock has been in recent history. Options with high Vega have experienced high volatility, and therefore could change price rapidly as the stock price changes.
High Vega options are more expensive; low Vega options are cheaper. VEGA is derived from underlying stock price movement. Using historical volatility, Theta, stock price, option premium and a few other factors, and theoretical value for Zeta is calculated.
Zeta is derived primarily from market premium of the option itself. When Vega and Zeta are positive, increased volatility is helping an option position by increasing its value; when they are negative, increased volatility is hurting the option position if you are buying calls and puts. When Zeta is higher than Vega i. Implied Volatility is higher than Historical Volatility , options prices could be overvalued, and this is a good time to Sell Options.
When Vega is higher than Zeta , options prices could be undervalued, which may be a good time to Buy Options. I love selling options for high priced stocks with high volatility and high Theta. They sell for a good price, they quickly lose value, and they are nicely profitable.
I will often sell a nice expensive, volatile option three days from expiration. The only really important issue is that you know what the trend of the stock and the market are doing.
Return from Option Greeks to the Home Page. On this page you will learn the about the way changes in options prices are measured. Yes, this is the dreaded subjects of Option Greeks! No, not the heros who crossed the Alps on elephants, nor the brave fellows who dealt a blow to the Babylonians. These are just 6 Greek letters that look scarier than they really are.
You do not need to be a mathematical genius. Just get a grasp of the concepts! Look for patterns; take a big picture view.
An outstanding Options Trading Course that I recommend. The follow up course is even better! Option Greeks Option Greeks is a difficult topic. Delta DELTA measures the rate at which the price of the option changes with changes in the underlying stock analagous to speed.
And that is the Option Greeks! Here is a detailed video on Stock Option Greeks: Articles for Newbies What is Option Trading? Most Profitable Options Strategy. Selling Options Selling Options. Buying Options Buying Options. Volatility Trading Strategies Volatility Strategies. How to Trade a Straddle.
How to Trade a Strangle. How to Set Up Zulutrade. Product Reviews Trading Pro System. Looking for some further study on option greeks? Here is my top pick: